Why Investors Are Tuning Out Fed Tapering

fed-tapering

It was a year ago when the word “taper” sent Wall Street into a frenzy.

Former Federal Reserve chief Ben Bernanke uttered the word, saying that the Fed could “taper” back its $85-billion-a-month bond-buying program in the coming months. Investors freaked out. The VIX – a.k.a. the fear index – spiked 24% in the weeks after Bernanke said “taper.” Meanwhile, stocks declined 1.6%.

No one wanted to see the Fed’s latest stimulus measure, known simply as “QE3,” come to an end – not given how well stocks have performed during the three rounds of quantitative easing.

The Fed first initiated quantitative easing in November 2008, during the depths of the Great Recession. Since then, quantitative easing has been in place for a combined three and a half years. During that time, the S&P 500 has risen 75% – or an average of 21.5% per year. In the nearly two years that quantitative easing hasn’t been in place since 2008, the average annual return has been a mere 4.5% (see chart below).

So it’s easy to see why investors didn’t want QE3 to end. Quantitative easing has been perhaps the biggest catalyst driving stocks to record highs in the past 12 months. Without it, the U.S. economy – and, by proxy, the stock market – will have to stand on its own two feet.

For months, investors feared fed tapering. Wall Street held its collective breath prior to every monthly Ben Bernanke press conference, hoping the Fed wouldn’t start scaling back QE3. The angst was palpable.

Now that tapering has actually arrived, that fear seems to have vanished.

The Fed began scaling back its monthly bond purchases on Dec. 18. You would have thought panic might ensue. Instead, stocks rose 2% in the two weeks that followed.

In the months since, the Fed has continued to taper, reducing its bond purchases from $85 billion a month to $45 billion. During that time, the S&P has advanced another 3.2%. And the fed tapering announcements have been met with apparent disinterest.

Just look at how investors have responded to the last four Fed announcements, each of which reduced quantitative easing by another $10 billion:

Dec. 18: The S&P 500 was up 2% in two weeks

Jan. 29: S&P 500 +2.6% in two weeks

March 19: S&P 500 +1.9% in two weeks

April 30: S&P 500 -0.5% in five days

None of those moves are evidence of investor panic. The threat of fed tapering inspired fear and volatility on Wall Street last summer. Actual tapering? That has received little more than a yawn. Investors no longer seem concerned with the prospect of quantitative easing coming to an end.

Perhaps that will change once the Fed completely pulls the plug on QE3. After all, $45 billion a month in bond purchases is still nothing to sneeze at. But the lack of investor reaction since fed tapering began seems to bode well for what happens to stocks after quantitative easing disappears.

Maybe it’s a sign that investors are confident that the U.S. economy is finally strong enough to flourish on its own without artificial help.

That, after all, was a major reason why the Federal Reserve implemented quantitative easing in the first place.

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Published by Wyatt Investment Research at